'Not for Free': Saul J. Berman on Creating New Revenue Models

The "phenomenon of free" has hit many businesses hard, particularly media businesses, argues Saul J. Berman, Global & Americas Leader for the IBM Strategy & Change Consulting Group within IBM Global Business Services (GBS). In Not for Free: Revenue Strategies for a New World, Berman offers lessons from businesses that have integrated successful business model innovations -- including Google, Amazon, Apple, Redbox and Hulu -- as well as from businesses that have failed to do so. Recently, Knowledge@Wharton and Jerry (Yoram) Wind sat down with Berman to discuss his thoughts on who pays for free content and why new models are essential for success.

The following is an edited version of that conversation.

Knowledge@Wharton: Saul, thank you so much for joining us today.

Saul J. Berman: Thank you for having me. I appreciate the opportunity.

Knowledge@Wharton: In 2008,Chris Anderson, the editor of Wired, wrote a very famous article that was titled, "Free: Why $0.00 Is the Future of Business." Based on the book that you have just written, was he right or wrong?

Berman: Well, it depends on how you want to interpret the question. He suggested that content would increasingly be free and that free was a much better price than near-free. I argue that somebody is paying for it somewhere. So, in some cases it may be free to the end consumer, but the point is that it is not really free. It is being paid for: maybe by an advertiser, maybe by a sponsor, maybe by somebody who wants access to a group of people for other purposes or somebody who is bundling it with other products or services they offer. But in one form or another, it is not free. Somebody is paying for it and somebody is seeing that the people who create the content will continue to create that content and be reimbursed for it.

In the case of the music industry, which was one of the first examples of disruption, we can see in our analysis that music is worth more than it ever was. It just doesn't go to the music companies anymore. The value of music goes to the people who make devices for you to listen to your music on. It goes to the cell phone companies that enable you to download music. It goes to the concert promoters. Since there is more sharing of music out there, people know more about the artists, which, in many cases, means the attendance for concerts has gone up. Overall, the amount of revenue has actually increased, and it is really not for free, though it may at times be free -- or perceived to be free, not that that's appropriate or legal -- to the end consumer. Though, again, there has always been advertising. Some of these models have always been out there, where you can get things without direct payment.

Knowledge@Wharton: Let me push back very gently on this issue.Let's take a company like Google that provides Gmail for free. It helps to build a massive audience. It does not directly charge the consumer, but at the same time, it is able to monetize the traffic through the advertising that it is able to sell alongside the emails. Is there anything wrong with that sort of a model?

Berman: Well, when you say "wrong," I am not sure we are into qualitative judgments, ethical judgments or economic arguments here. From an economic perspective, people are in business generally to make money, so somebody is making money out of the equation. The people who are creating the content are somehow making money, or they wouldn't be able to sustain their business in the long term.

So, again, back to my music company example. If the music companies themselves don't find a way to monetize the content they are involved with, either they won't be part of the equation or they will have to participate more so than they do today in some of these other revenue streams.

We argue not only about how much money is associated with content, but also who gets that money. In many cases, what we are seeing is the money shifting to other people because the business models are changing.

Knowledge@Wharton: But in Google's case, it is still Google that makes the money -- just not on the email, but on the advertising. That's where the question comes up. What's wrong with that?

Berman: I don't see anything wrong with that. That is a business model or business proposition. I use the example in the book of the Gillette razor blade model. Historically, Gillette gave you the razor for free -- or near free -- and you paid forever for the expensive blades, on which they made a very nice profit. Well, what Apple did when they created the first iToy, as I call it -- the iPod -- they gave you the music for free -- or near free -- 99 cents. That was the equivalent of the blades. They shared that money with the music companies very nicely -- 70% or 75%. But all of a sudden the razor -- or the device to listen to the music on -- became very expensive and they kept all the money on that. So they shifted the proposition. There's the opportunity in each of these innovations around different mechanisms for compensation, whether they be payer, pricing or a different model. There are going to be opportunities for the value to shift.

Knowledge@Wharton: Jerry, do you think that sometimes what is perceived to be free is actually paid for -- but in terms of information rather than cash? Is there any value to that?

Wind: The question is from whose point of view.

Berman: Right.

Wind: If you look at it from the consumer point of view, I would suspect most consumers will perceive the products that they get for free as free because they don't see the advertisement as a payment. From a consumer point of view, free may be a great component of the value proposition of deferring. But I think the key point that Saul is making -- and which I really like in the book -- is the idea that [it is important to] start paying attention to the business model and the revenue model, and to ask, how are you going to make money eventually?

Google is a great example. The overall Google proposition -- or the business model -- is still very valid. They make money off of this. Can they make more money if they start charging for Gmail or for some of the other components? That is a different question. But there is real value in focusing the attention of management on what your revenue model is. How are you going to make money? Look at this in the broader context.

Berman: You have to look at, as Jerry is saying, the broader consumer experience. That experience is the combination of content, hardware and software. It is the integration of those pieces and the creation of the experience that often gets the value. The challenge is who is going to control that value in these different mechanisms for monetizing. Is it going to be the hardware company? Is it going to be the software company? Is it going to be the content company? Is it going to be a fourth party that puts all those propositions together? That is where the interesting challenge is and the opportunity to make more money even if, as you say, it may be free to the end consumer in terms of the direct pricing model. There may be indirect payment by somebody else or otherwise to monetize.

Knowledge@Wharton: I know you focus a lot on workable business models in your book. When it comes to business models for information goods, do you think that free could be one price point along a continuum of prices for information goods?

Berman: Well, yes. There can be a free-to-the-consumer model for the basic service, and then you try to get everybody to trade up to what Chris calls a "Freemium" model, where you charge more for additional services. Take an automobile, which we talk about in the book as well. The value-add in an automobile includes the sensors, actuators and intelligent information that comes from them.

So we can now provide help with navigation. We can provide entertainment services. We can provide concierge or restaurant reference services in the car now. Increasingly, just like the car companies may have made money in the past for selling you after-market service on your vehicle, now they have improved the quality of the vehicle, and they may make more money from these subscription-based entertainment or other types of concierge and information services. That may be where they make a lot of their money in the future.

Now who gets the money out of that is still an open question. But the adoption of the information sensors, actuators and connectivity -- those devices can now control the refrigerator or the washing machine or the heat or the security system in your house at the same time. So there is a world of possibility opening up and the question is, how will that work as every product becomes more information-based?

Knowledge@Wharton: One industry that has been hugely disrupted by free content is, of course, the publishing industry. What are your thoughts on survival strategies?

Berman: I would like to hear what Jerry has to say on this one.

Wind: First of all, let's link it back to the previous question in terms of digital product or information product in a single price or continuum. I don't see really any distinction between information products -- or digital products, in general -- and regular products in terms of product line when you have to start thinking about a product line offering. The product line can be from free to whatever price it is. The key is going back to what Saul was describing before -- the move from product to service to integrated offering, a tall solution, and, most importantly, the customer experience. Each one of these is a value of social business and, therefore, the willingness of a given segment to pay for this.

The same thing is true in the publishing area. People still want to hear, read and find out about the news. They just don't want to read it in the traditional form. There is also a segment that may be lagging behind -- a segment like me. I still like to read The New York Times on paper and for the feel, but I am part of a shrinking segment. What you have to realize is that the market is heterogeneous. That's one of the key things we know about marketing. Therefore, you want to offer the news in a variety of ways. Furthermore, it is a re-definition of news. What is a newspaper? Is it only news? Is it entertainment? What is the nature of the offering? I think the publishing industry is now in a situation where they see an opportunity to re-invent themselves, to ask, what is the value proposition? What are we trying to offer consumers and how do we integrate news with entertainment?

From some data we have seen, my understanding is that younger people get most of their news from Jon Stewart. What is the competition of the newspaper to a Jon Stewart--type show and delivery? It is a great opportunity to innovate -- a great opportunity to rethink what publishing is and what it is we are trying to do.

In general, I think that Saul's book offers a great opportunity for companies to reinvent themselves and to rethink how they can come out with a more innovative solution. You will not be able to innovate if you just stay within the boundaries of your old industry definition. By rethinking business models and revenue models, there is a great opportunity for innovation.

Berman: Let me give you one of my favorite examples, which is the music industry example again. The industry was under all this pressure. Albums sold from $9.99 typically online. Songs sold for 99 cents until the industry got Steve Jobs to let them raise that price a little. But a ring tone, which is a 10-second clip of a 99-cent song, people were paying $2, $3, $4 or $5 for. Now bits of your overall content are worth more than the whole. That is a pretty good business model if you can make it work.

If you are a book publisher or a newspaper publisher, increasingly you are able to take the archive, and you are able to monetize content from [it], in some cases, for more than the original newspaper or the original magazine would have cost you -- or a chapter in a book for more than what the Amazon price on that book might have been.

Knowledge@Wharton: I would love to get your thoughts on one other area. If you look at what has been happening recently among young people in the Middle East, the vast majority of them have been getting their information not from newspapers, magazines or even radio or television. They have been getting it from Facebook and Twitter, especially because of the curbs that the government put on the Internet. Both of those happen also to be free services. How, then, should people think about revenue-generating models in publishing?

Berman: First of all, they are not, in my terms, totally free. Facebook makes a lot of money from advertising, though many people don't realize it is even there. But they are making a lot of money on it. So, again, it is being monetized. The other point is as you get more of that information and use it, it is creating stars. It is creating new vehicles around the people who become famous for sharing content over these services. Those people are finding other ways to monetize the celebrity or the status that they have created by being an authoritative source who contributed to something. So both the provider and the individual are increasingly going to find ways to monetize, or they are going to have to find something else to do with their time.

Knowledge@Wharton: Do you think that, in publishing, content creators are being eclipsed by what are called "content curators"? And what are the implications?

Berman: Interesting question. We do think there is a big role for curation as a value-added service. We think there is a big role for analytics. Companies like Bloomberg have long created value around the analytics. We have told people in the information publishing space, beginning five years ago, that they have to do more than just, if you will, provide the information. They have to provide people the tools and capabilities to do different things with that information and they have to provide analysis and insight.

Increasingly, it gets back to the point we make about the experience. There are lots of different ways to monetize, which we outline in the book. You can monetize with different audiences in different ways.

Knowledge@Wharton: Just one last question: You have examples in your book about innovative business models involving Progressive, Redbox and so forth. Could you give us some more examples?

Berman: Sure. Obviously we are all familiar with some of the ones in the music space where now you can buy singles. You can buy ring tones. You can buy à-la-carte individual tracks. But companies, like Netflix, came along and turned what was a pay-per-view or buy media experience into a rental media experience. Redbox came along and provided a less service-oriented, go-to-a-vending-machine, lower-price way to get that content. So we talk about the idea of variable pricing. You can sell different things to different people at different times.

The airlines go further with dynamic pricing. They will sell not only different things to different people at different times, but the price will change at different days or times of the day. So there are lots of different ways. What is new is that you take them to another industry in many cases. We talk about Zipcar in the book. Instead of buying a car or leasing a car, you can subscribe and rent it by the hour, by the day, or whatever you want. You get charged for your usage of that vehicle, and the vehicles are staggered all over and you can go use them.

There are examples of advertising in spaces where they have never been used before, such as the phone business. Instead of paying for information services, you can listen to an ad and get free information services. Even in industries such as medical, now we are seeing people experiment with pricing based on results. In some cases, where drugs have not been approved by insurance companies, some of the medical drug companies are experimenting with, "You pay us if it gets results for you." If it is in the experimental stage and hasn't been approved and your insurance company won't pay it, take the drug. If it lowers your whatever and improves your medical condition, then pay us for it.

So some of these models -- or most of them -- have always been around some place. The challenge is now applying them in different ways to different businesses. In the book, we categorize them into three categories.

The first category is pricing, where you change the direct price and the way you price to the end consumer. This applies in a B-to-B world as well, where we used to invest in assets and build capabilities in companies. Today, we might outsource them and pay somebody over time. We are still paying, but we are paying in a different way.

Payer innovation is the second category, where someone other than yourself pays. We are seeing many more ways to do advertising, sponsorship or performance-based types of payment that are indirect and from other people.

And, finally, package innovation, where you package it with something else or sell the parts as we suggested in the cell phone or the publishing case. What we think is the real challenge for most companies is they are going to have to have multiple ways of monetizing for different consumer segments who will want to pay in different ways. Some will say, in effect, "I want it to be free to me. I will pay in some other form." Others will pay directly: "I don't want the advertising. I don't want anybody having my name." Even there, there are going to be different ways of doing it. As I say, the challenge is how do you do this in a way that makes sense to the different segments and then be able to manage that complexity in your business?

Knowledge@Wharton: Saul, thank you so much for speaking with us.

Berman: It has been a pleasure. I appreciate the opportunity. Please send me a note if you have any questions at Saul.Berman@us.ibm.com, and please let me know what you think of Not For Free.

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2817

Is Your Marketing Killing Your Consumer Electronics Product?

Every day, multi-million dollar consumer electronics products suffer the consequences of poor, lazy, ineffective, uninspired, unprepared, overly-technical, follow-the-status-quo marketing. Were it not for the intense media and consumer interest in high technology, the industry would be in big trouble. The products at retail are generally good, but the marketing ranges from atrocious to bad.

The consumer electronics industry is succeeding in spite of its marketing.

I define the most successful consumer electronics as those which have the most evangelists — passionate, high-energy communicators — among mainstream consumers. Based on my observations and experience, the most successful products in the industry are various Apple devices (the iPad, the iPhone, and the Mac), the Amazon Kindle, and the Netflix service. These three companies create more mainstream evangelists as a percentage of their total users than other companies. Think of the way these companies are talked about by your friends and family — more than likely you know an evangelist of one or more of these firms.

So, the question becomes, what separates them from other players in their markets?
First, the products share elements that elevate them above the consumer electronics commodity bin: all of them make people feel good, exceed already high expectations, and improve people's perceived quality of life.

But other devices that don't have evangelists also meet these three criteria for product excellence: consider HDTVs, digital cameras, even a good cable service.

So what's the difference between an iPad and a Samsung HDTV? Why does one create raving fans and the other create users? Why does the Kindle inspire a critical mass of mainstream consumers to tell everyone they know how much they love the Kindle, while Kodak digital camera customers simply takes pictures and stay quiet? (Have you ever heard anyone say they don't like their Kindle? I've talked to hundreds of people about it, and I haven't.) The Kodak camera is a great, affordable device, but the company does not enjoy mainstream evangelists.

The difference is marketing.

And while there are many actions that separate the best from the rest, after years of working with top consumer electronics brands as a marketing consultant helping clients brand, position and evangelize their products and services, I've realized that it all comes down to three things: knowing what your customers want, giving it to them, and then communicating about it simply and relentlessly.

Let's look at each one:

Knowing What Your Customers Want

Apple knows what its customers want because of its CEO, Steve Jobs. He has proven that he knows, on instinct, what will succeed with consumers. In fact, he famously avoids customer input and focus groups because he is so sure about his own gut feeling. But because your CEO is not Steve Jobs, you'll have to do talk and listen to your customers like crazy. This means qualitative, one-on-one interviews. They can be brief — ten minutes is often enough. But you must allow yourself the opportunity to probe and ask follow-up questions based on their responses. This eliminates online surveys and focus groups.

Here are 10 questions to ask:

1. Who in your home uses our product?
2. Why do they use it? (Leave it open ended, just like that.)
3. What do you do with the product?
4. What features do you use most? Why?
5. Which features do you NOT use? Why?
6. What's your favorite thing about owning this device?
7. What do you tell your family and friends about the device?
8. How does our product improve your life?
9. Describe our product using three descriptive words.
10. How does our product make you feel?

These questions get you away from technical specifications and move you towards the real-life value of your device.

I often conduct these interviews for clients — big brands, companies you hear about frequently — and I can tell that the findings are almost always surprising to my clients. The language consumers use to describe my clients' devices is simpler and almost entirely focused on the life-improving outcomes of the products. Out of 100 customers, maybe one or two talk about technical specifications, the rest focus on real-world emotional value.

Giving it to Them

In asking the questions, you learn what your customers want. The answers to these questions become the most powerful consumer marketing language you can possibly use. The words of your market are the best language for your market.

I can tell you about any number of my clients who have executed this approach successfully, but cannot elaborate here due to confidentiality. However, if you want an extreme example: Microsoft (not a client) did this recently with its wildly successful "I'm a PC" television advertisements. These were simple, straight-forward, feel-good, emotional and featured real people — happy, hip, pleased with their experience — talking about exactly what parts of a Windows PC improve their life. These were powerful commercials, allowing viewers to immediately identify how a Windows computer might affect their day.

Communicating Simply and Relentlessly

I've found that simple always wins in marketing. The less technical specification the better. In consumer electronics, "simple" is the answer to this question: How does this product improve people's lives? And relentless means you must never stop communicating. Even pauses are harmful. Look what happened to Palm, which, at one point, just stopped communicating with customers. In consumer electronics, if you stop communicating, gravity pushes you out of people's minds. The competition will pass you by in three seconds. You must innovate and execute your marketing relentlessly just to maintain the advantageous position you've attained.

If you've attained a space on retail shelves, I can say fairly confidently that your product is good enough to attain evangelists. The rest, the magic, is in the marketing.

Why Europe Will Negotiate a Greek Default

As another Euro summit takes place today, with another bailout package for Greece on the table, it's important to realize that what we're talking about is not whether to "rescue" Greece. Rather, we're discussing how the Germans, other rescuing countries, and bondholders and other private investors are going to have to pay the bill and perhaps how big the bill will be. To see why that's so, just look broadly at some possible outcomes to the Greek crisis

If a haircut for bondholders and other investors is required as part of an agreed bailout package, everyone with investments in Greece participates in the hit. The share of the package borne by the public sector in Germany and other strong Euro countries will presumably have some impact on their public finances. A deal of this sort, however, would be attractive because it would allow for some management of the scale and timing of default.

If Greece gets bailed out through a loan package and there is no haircut on bondholders and other investors, the interest burden on the Greek economy would continue, and with Greek debt to GDP at current levels, the Greek economy would be forced into a sustained depression, probably requiring subsidies and aid to fix. The pressure to bail out other struggling companies in a similar way would be intense. The continued bailouts would have to be funded by more taxes or more debt in the rescuing countries. This solution would defer the reckoning but not for long and it would almost certainly increase the scale of the losses for all concerned.

If there is no bailout and investors refuse to take a haircut, Greece can just declare a default, and other investors will take the hit. This would take control of the size of the bill out of investors' hands. That might be good for Greece, but it would involve sacrificing Greece's ability to raise funds on a large scale abroad for the foreseeable future. Greece would have to be perceived as a potential Asian tiger to get investors to come back in. This is not an attractive option for anyone except maybe in the very short term for Greece.

Greece could also simply leave the Euro, converting its obligations back to drachmas. But other investors would still end up footing a bill (through the devaluation of their assets once the drachma went into free float and got marked down in the forex markets) and they'd have no control over the size of it (that would be the markets). This would seem to be an attractive option for Greece, because it could perhaps technically be dressed up as something other than a default, but it's probably not good for creditors in the rest of Europe.

Whichever way you look at the evolution of the Greek crisis, there seems little doubt that a bill has to be paid. Greece is in no condition to grow its way out of its debts unless the debts are reduced. Since Greece has one unilateral option that's arguably economically attractive from its perspective (dropping out of the Euro) it would seem that everyone else has a stake in arriving at a bailout package that includes a haircut before Greece starts to se the economically attractive as politically attractive too. Negotiations about a lot of money always involve a certain amount of bluff and brinkmanship, so we can expect a rocky ride to get there, but we should, in a rational world, expect to arrive. Watch this space

How to Survive a Direct Attack

The annual shareholder meeting of Yahoo! Inc. last month was an "unlikely lovefest" — according to the report of the event in the New York Times — unlikely because the company's stagnant stock price and poor performance against its competitors would seem to have invited a more critical session. The lovefest carried through more than an hour of glowing outlook from the board and management as well as softball questions from the shareholders.

But then, a man called Steve Landry took the floor. Landry identified himself as a personal investor who also advised institutional investors holding more than a million shares of Yahoo! He then proceeded to attack the company in general and its Chief Executive Officer, Carol Bartz, in particular. Addressing her directly, he said, "It came out earlier this week in a blog that the board is secretly talking to other potential CEO candidates. I've heard similar details and believe that it's true." He then went on to say, "the last thing Yahoo needs is a lame duck CEO... The buyout talks of your contract need to start today and a search needs to be accelerated."
According to a transcript of the webcast, Bartz responded:

Thanks for your opinion, the bloggers and the rumors. What else? Wonderful — that was certainly a downer. So again, thank you for coming to Yahoo! We are working very, very hard in this company and managing our assets and we will see the benefit of that.

Reports of the exchange in the major financial press — the Times, Wall Street Journal, the New York Times, and CNET — carried only the central phrase of Bartz' answer, "that was certainly a downer." This left readers with the impression that Landry's direct attack had damaged her.
Bartz did the right thing in ending her answer on an upbeat note, but made two tactical errors at the front end of her response, both of which outweighed and therefore overshadowed her positive effort.
1. She failed to address the issue in the attack
2. She validated the negativity
Instead, Bartz should have said something along the lines of,

Yahoo!'s policy is not to comment on rumors and blogs. What I can tell you is that we are working very, very hard in this company and managing our assets and we will see the benefit of that.

These two issues provide larger lessons for how any presenter should handle tough questions.
1. Presenters have every right to take every opportunity to make positive statements about their companies, but they must first earn that right by addressing the central issue in the challenging question or statement. They may agree, disagree, admit, correct, or deny the issue, but presenters cannot leave it ignored. Yahoo!'s policy is not to comment on rumors and blogs.
2. Negative facts may be sad but true — Yahoo!'s stock price has been stagnant — and presenters can actually be forthright about it, but they cannot validate the negativity by letting it hang, twisting in space: that was certainly a downer.
Instead, presenters can admit to negative facts — so as to be transparent — but then, after a brief, very brief, admission, they must immediately follow it with an upbeat counterpunch. Yes, the stock price has been stagnant, but when you consider the outlook for the new products that you heard about today and the fact that we are working very, very hard in this company and managing our assets, I am confident that we will see the benefit of that.